Question

Wehrs Corporation has received a request for a special order of 9,100 units of product K19 for $46.00 each. The normal selling price of this product is $51.10 each, but the units would need to be modified slightly for the customer. The normal unit product cost of product K19 is computed as follows:

Direct materials	$	16.80
Direct labor		6.10
Variable manufacturing overhead		3.30
Fixed manufacturing overhead		6.20
Unit product cost	$	32.40

Direct labor is a variable cost. The special order would have no effect on the company's total fixed manufacturing overhead costs. The customer would like some modifications made to product K19 that would increase the variable costs by $5.70 per unit and that would require a one-time investment of $45,500 in special molds that would have no salvage value. This special order would have no effect on the company's other sales. The company has ample spare capacity for producing the special order.

Required:

Determine the effect on the company's total net operating income of accepting the special order.

Answer 1

		Per unit	Per unit	Total for 9100 Units
Special Sale price			46.00	4,18,600
Direct materials	$	16.80
Direct labor		6.10
Variable manufacturing overhead		3.30
Additional Variable cost		5.70
Total Variable Cost			31.90	2,90,290
One time investment for special order				45,500
Net Operating income				82,810
There is increase in total net operating income of accepting the special order
Note: Fixed Manufacturing overhead is irrelevant
Company has ample spare capacity